Q&A with the Company That Powers Google Wallet

With this week's release of an app for paying for lunch meals in K-12 schools, cloud-based and mobile payment options are in the spotlight.

Payment processing through websites that utilize cloud computing has been going on for years. The newest iteration is a MyPaymentsPlus app from Horizon Software in which parents can add money to their students' school lunch accounts. While this app doesn't allow students to pay at the lunch counter, other systems do that use near field communication (NFC), such as Google Wallet.

In an April survey by the Pew Internet & American Life Project called "The Future of Money in a Mobile Age," 65 percent of 1,021 Internet experts and users agreed that by 2020 most people will swipe their smart devices and pay for purchases through NFC. Cash and credit cards won't be used much in developed countries.

But 33 percent said that people wouldn't trust NFC devices, particularly due to security concerns. And they said they wouldn't want technology companies to know what they buy. 

We caught up with Javed Chaudry, vice president of software product management at ViVOtech. The company's technology powers Google Wallet, the mobile payment system introduced last year. Chaudry talked about where mobile payments are headed and what effect they could have on education institutions. Chaudry provided background on the two major types of mobile payments, explains security issues, and shares his thoughts about potential adoption rates in government.
 

Could you explain the Google Wallet concept, mobile app payments and some of the other terminology out there?

Mobile payment is a pretty broad term. In today's world it has come down to two different approaches to how payment is conducted through mobile.
 

1. Near field communication on device wallets

The whole industry discussion these days on NFC relates to the wallet that fits in the handset of the device — your smartphone — and communicates with point-of-sale terminals. As you tap your phone to the point-of-sale terminal, the payment credentials from your phone get transferred to the point-of-sale terminal over the air using NFC technology. And that "handshake" that I'm referring to is not dependent on a cloud-based solution or data sitting in cloud.

That’s what Google Wallet has been doing, and that's what most mobile operators are planning on delivering. An organization called ISIS — a consortium of three major carriers in the U.S — is moving in that direction.
 

2. Cloud-based wallets

Most of the online purchases today that you make with specific vendors that have already set up your accounts and credit cards are called "cloud wallets." The difference between cloud wallets and NFC is how the payment credentials get transferred to the merchant. In the case of the cloud wallet, your payment instruments are sitting in the cloud; they're not on the phone.

Recently, PayPal has actively pursued the physical retail direction. What they are doing is having you go to, for example, Home Depot. As you walk in, your identity is determined by entering your PIN code or your email address in the point-of-sale terminal. The merchant's back end automatically gets the information through the cloud from PayPal's back end and gets your credit card information without you having to provide it to the merchant in the physical store.
 

The effect of wallets on merchants and parents

Significant customization of a merchant's back end is required, which is very difficult to scale for everybody because each merchant is going to have to set up that interface with each of the cloud providers, like iTunes, Amazon, PayPal and others that want to process cloud wallets at retail stores. 

There's no one solution that can automatically set up all those back ends. Each merchant has to individually upgrade its system, which they aren't happy about.

On the other hand, NFC is a technology that is standards-based. So any MasterCard or Visa point-of-sale terminal will be able to do NFC payments without any modifications as long as the MasterCard PayPass contact list payment is available on the reader the merchant is using.

The benefit that NFC offers is the standardized approach, and that can scale really well as NFC devices become available. The NFC devices are still in the early stages, and we are expecting very rapid growth. In the next two to three years, you'll see broad adoption of NFC in most of the handsets — at least most of the smartphones. NFC payments are going to be a standard way of handling mobile payments at point of sale.
 

How are school districts handling payments?

In our local school system, through the vendor's automated system, we get a call at our home phone number that the balance is low for our kid's school meal program. The next morning we send a check with our kid. But it is a very non-digital way to handle this.

What Horizon Software has done is not mobile payments. It's more like account management through a mobile application. These kinds of service providers in the education and school systems are providing a cloud-based wallet solution just like Amazon or iTunes, and linking each student's name to the account.

You can update that account with your credit card because that account is linked either to your credit card or your checking account. The actual payment event doesn't necessarily happen through the mobile space.

It's basically an application that allows you to look at your balance and transaction history. If the balance is low, you might get a text message on your mobile device or be able to authorize the refilling of that account through your mobile app. But it's not actually the payment event.

When do you public institutions such as schools and universities will need to offer mobile payment options?

It really depends on customers. What's the most convenient way for students to pay? From that perspective it will certainly take time for broad availability of devices.

The government's expectation is that not every student is going to be able to afford a phone. So there will always be multiple mechanisms to make the payments work in a school environment. You cannot count on one way or the other. The technology growth in cloud wallets will happen quickly. There will still be other traditional ways, like getting a phone call.

When it comes to government adoption, they don't want to leapfrog too far ahead because they have to support every household that may have different technology adoption. They will continue to do what they're doing today, but they also will add cloud wallets. I'm expecting that in the next three to five years, the education systems will upgrade their terminals and interface points to accept the NFC-type payments.

Government deployments will typically lag maybe one or two years after the commercial. Once the broad availability of the NFC-type experiences happen in retail, you'll see that rolling over to the public sector a year or two later.
 

How do potential security issues with mobile payment compare to those with plastic cards or online payment?

If a child has a cloud-based wallet solution as they have today, they say their name to the person at the lunch counter and ask them to take the meal money out of their account. That has it's own flaws in terms of security.

The growth that you will see in NFC is fundamentally because it's much more secure than existing payment mechanisms in which you have credit cards that can be easily duplicated. You have credit cards that have clearly visible numbers, and anyone can take those numbers. When you set up a cloud-based account, unless you have a driver's license (which kids don't have), how do you identify them? Those things come into play.

In the case of NFC, if you own a cellphone and set up a PIN, then nobody can use that cellphone to pay for meals without knowing that PIN code. No one can see the number of your payment instrument that's on your phone because it's all encrypted.

However, the lack of devices right now is limiting that adoption. That's why cloud-based wallets are getting more traction and have been — most online payments and virtual online merchants have been using these online wallets or cloud wallets for many years already, so it's not a new learning curve for the consumers.
 

What could these wallets cost school districts?

NFC investment would be low from a systems perspective. Most of these mobile wallet providers will already have their wallets. So a $100 upgrade of a point-of-sale terminal would automatically enable a school district to take NFC-type payments without investing in a cloud wallet.

But if school districts have to do cloud payments, there will be a back-end system they will have to run and manage, and make sure the security is there.